HMRC issues in-depth guide to alternative tax dispute resolution

The manual covers the whole ADR process from beginning to end. It includes guidance on the circumstances in which ADR can and can’t be used; the role of the mediator before, during and after the mediation meeting; how a mediation meeting proceeds; and the interaction between ADR and HMRC’s litigation and settlement strategy.

Among the positions confirmed and clarified in the guidance is that mediation meetings will now default to either video or telephone, following the pandemic-driven hiatus of face-to-face mediation meetings. The decision rests with the mediator, so any taxpayer who specifically wishes to conduct an ADR meeting in person will need to make representations to the mediator early in the process.

Tax expert Steven Porter of Pinsent Masons said that much of the guide would be familiar to those who have already used the HMRC ADR process, as it builds on briefer documents previously published by the department. However, he urged those facing a dispute to scrutinise the new publication, as it contains some new information.

The most important section of the manual is the section that explains how HMRC will use information that comes to light in the ADR mediation meeting. The meetings are held on a ‘without prejudice’ basis, which is defined by HMRC as where “the parties are able to propose and explore possible solutions to the dispute under consideration without having to worry that their discussions will in some be regarded as an admission should the parties not reach an agreement”. However, the guidance goes on to say that any ‘tax fact’ – defined as “a fact which has legal and technical implications for a taxpayer’s liability” – that comes to light will not be treated as confidential to the mediation meeting, and should be recorded as such in the formal record of the meeting put together by the mediator.

There is also a short section that refers to the mediator’s notes of the meeting. It states that notes are not accessible to the HMRC team working on the matter, but may be disclosable should a case proceed to tribunal where the notes relate to new tax facts. These statements “are in direct contradiction” with HMRC’s existing brief fact sheet on ADR, which specifically states that the mediator’s notes will be destroyed after the meeting, Porter said.

As has long been the case, the “independent” mediator is actually an HMRC officer who has been specifically trained as a mediator, and who is from a different team within HMRC and has had no prior involvement with the case. There is now specific guidance setting out that taxpayers have the option to involve a professionally accredited mediator from outside HMRC at their own cost. However, the guidance also makes clear that any non-HMRC mediator must work within the HMRC guidelines and, importantly, that the HMRC mediator “has final control over the mediation process”.

“This appears to be a shift away from earlier practice where HMRC would split the cost of a third-party accredited mediator,” Porter said. “The requirement to use an HMRC mediator will make some taxpayers – particularly where the relationship has broken down – very sceptical about the process.”

In addition to the existing list of specific dispute types that HMRC does not consider to be suitable for ADR, such as automatic late payment penalties and higher income child benefit charges, the new manual states that HMRC will not usually allow mediation in disputes on the same issue as one in which it wants to get a test case before the Tribunal. In addition, where HMRC has significant doubts about the veracity or strength of evidence provided, it will want to test it using cross-examination in the Tribunal. The guidance also acknowledges that ADR will not happen where one of the parties does not want to use it. Where there is dispute about whether a case is suitable for ADR, it will be decided by an ADR panel within HMRC.

Steven Porter said: “While the exclusions from ADR make general sense, the statistics on the numbers of disputes being resolved using ADR show an extraordinarily low level. Approximately 1,000 cases were referred to ADR in the last tax year and of those only 269 were resolved through ADR. When compared with a total of over 15,000 appeals lodged at the tribunal, this is incredibly low.”

“Following the statement on the use of ADR issued by the Tax Tribunal in 2020, more taxpayers are considering the use of ADR, which will hopefully drive up its use,” he said.

The manual also provides a clear timetable for the ADR process. The expectation is that a case accepted for ADR will be settled, or at least out of the ADR process, within four months. To meet this expectation, both the taxpayer and HMRC must commit to provide information requested by the mediator within 15 days. There is also a new obligation on the mediator to ensure that the ADR process is not being used to delay compliance activities or the need for Tribunal proceedings. Where HMRC needs to obtain approval for any settlement agreed at the mediation, this must be done within a week of the meeting.

The new guidance makes it clear that the HMRC caseworker and their manager will usually attend and notes that, in some cases, HMRC technical or policy specialists will need to be present.

“While this is welcome guidance, experience has sometimes been frustrating where the HMRC attendees at and ADR meeting do not have any scope to agree anything other than what has already been set out in a decision notice,” said Porter. “Hopefully this internal guidance noting the potential need for policy or technical specialists to attend, coupled with the virtual nature of most ADR sessions, will result in the improved attendance of the right people to negotiate.”